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Elekta AB (publ)
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Welcome to the Elekta Q2 Report. [Operator Instructions] I will now hand you over to Gunilla Öhman. Please begin your meeting.
Thank you very much, and welcome to Elekta's conference call following the publication of our Q2 report for the fiscal year 2018/'19 that we issued this morning. I'm Gunilla Öhman. I'm interim IR manager at Elekta. And with me is Richard Hausmann, our CEO; and Gustaf Salford, our CFO. Our agenda today is shown here. And Richard will begin by describing the quarter in short and some highlights and events. And after that, Gustaf will dig deeper into the financials. And we will end with Richard rounding up and invite you all to the Q&A session. Welcome.Just a reminder. Some of the information discussed on this call, including our projections regarding revenue, operating results, cash flow as well as products and product development, contain forward-looking statements. These statements involve risks and uncertainties that may cause actual results to differ materially from those set forth in the statements.With that, I'm happy to hand over to CEO, Richard Hausmann.
Yes. Thank you very much, Gunilla, and good morning, everyone. This is Richard Hausmann, CEO of Elekta.Before we go into the quarter and our numbers, I would like to share some overarching impressions from the quarter and what I have heard when I've been out meeting with many health care professionals, customers and employees. Firstly, there's a strong market out there, and we continue to see good order and revenue growth in most markets. I also see a growing interest and a better understanding of the benefit of including the radiotherapy in the treatment regimens of more patients. Our thought leadership in precision radiation medicine positions us very well to capitalize these trends and, in the end, help more patients.Secondly, the interest in Unity is stronger than ever. Although we didn't book any orders in this past quarter, the sales funnel continues to grow, and we signed 2 new agreements in early November and are in final discussions with 2 more as we speak.Finally, I see many exciting opportunities out there, such as the huge Chinese health care development plans and the expected FDA clearance of our Elekta Unity. With our broad range of solutions, Elekta is very well-placed to meet these demands.I just want to remind you of our Capital Market Day in September. Many of you were present, and all in all, we had about 200 attendees both in person and online. I was excited to present our strategy and our focus on thought leadership in precision radiation medicine as well as announce our midterm financial targets. Just as a reminder, we plan to grow sales by 8% to 10% annually in the coming years and to reach an EBITA margin of over 20%, expanding up to 200 basis points by the end of this period -- of this midterm scenario.Now let's have a look at our numbers. We saw a double-digit order growth for both treatment and software solutions, call it our products, whereas service orders declined in some regions, which led order intake to grow 12% to 2% in constant currency in the total of the quarter. Our installed base, however, continues to grow. And with a clear focus on improving service order intake, we expect services to pick up again in the second half of the year.The interest in Elekta Unity is firm, and our sales funnel has continued to grow in the quarter also, and orders were booked. The order process for Elekta Unity is long due to budget cycles and tender processes, especially in the European public health sector. Two new agreements were signed in November already now, and we are currently in the final discussions on a second Unity in Utrecht and one in Turkey where all parties have committed to move forward within days. And we expect more to come in the remaining quarter 3 as well.We had a high level of start-up installations, leading to 15% net sales growth, 6% in constant currencies, driven by a steady flow of installations across our market, especially North America, Europe, Middle East and China. And finally, in Q2, we saw a strong cash flow in the quarter.Summarizing our first half year now. We see there's a robust market out there. Our estimate of the global market growth at the moment is around 7%. We see a solid order intake and interest for our products. Order intake is up 14%, 6% in constant currencies for the half year. Net sales were up 14%, 7% in constant currencies, which is in line with our guidance for the total year. And EBITA margin ended up at 16% for half year, 19.2% on a 12-month rolling basis. We see significant further improvement potential in second half as usual for Elekta. Gustaf will come back to this later in more detail.Some further color on the regional development. Starting on the left with North and South America, order intake decreased by 41% in the quarter, mainly because of an unexpected weak service order intake and partially because of a tough comparison from last year where we had a 21 C order booked. South America continues to be challenging partially related to the political situation, but our new regional management, which is in place now since a few months, is taking good steps to move our business forward.Over to Europe, Middle East and Africa where we showed a fantastic growth, 43%. I am truly excited to see how our new leaders in the regions are really making their mark and harvesting the strong market demand and grow our share. In Asia Pacific, orders were up 18% in the quarter. China, where Elekta has substantial production R&D, showed good growth in the quarter on a high level. In addition, there was solid growth also in Korea and Vietnam. In general, we are optimistic and expect continuous -- continued favorable market conditions worldwide.ASTRO in October was one of our customer relation highlights for the quarter. I was really glad to see continued great interest in our solutions with more visitors and sales leads than ever before in our booths at the congress. Our new software suite, MOSAIQ Plaza in particular, drew a lot of attention with fully booked demos throughout the exhibition; as did Elekta Unity, which is pending FDA clearance as we know.At the end of October, China's Ministry of Health announced its plans for investment in radiation therapy until 2020, which -- with up to 1,400 new linacs to be ordered. This is really exciting opportunity, especially since the plan is built bottom up with commitments from hospitals and regions in China. Over the years, Elekta has invested heavily in China with both dedicated local R&D and manufacturing. As a market leader in China, we are well-placed to capture a large share of these orders, with our additional services also in terms of education and training and our leading-market position products. Around the same time, I joined our team at the China International Import Expo. Elekta was the only radiation therapy company invited to this CIIE in Shanghai, and we made a great impact on visitors and the media. We signed around 60 letters of intent with hospitals and organizations all over China for a combined value of over USD 100 million. It was a great honor to promote and discuss precision radiation medicine with health care professionals and politicians and encouraging to see the commitment from the Chinese authorities to improve people's lives and health in China.After the quarter, in early November, we signed a new memorandum of understanding with GenesisCare amounting to over USD 60 million, strengthening our long and close relationship with the largest private provider of cancer care in Australia and Europe. Building on our partnership, GenesisCare will continue to use our software in all the clinics. We also agreed to establish a common research program developing low-dose radiation therapy for the management of benign disease such as arthritis.Finally, an update on Unity. During the quarter, 3 new Unity systems were handed over to customers. The University of Tubingen, The Royal Marsden Hospital in London and Odense University in Denmark. As I mentioned at the Capital Market Day, it's inspiring to hear the positive feedback from our customers now treating patients with Unity. Our system is doing exactly what we promised the market that it should do. The number of research papers continues to grow as well as media articles being published. And it was inspiring to see another 11 abstracts presented at ASTRO this year.As I said, our sales funnel has continued to grow in the quarter. Looking at the total number of systems on order as of today, we are now at 36 -- or 34, if you will, but 36 very soon, including the 2 plus 2 in November: Olivia Newton-John in Australia, the PLA hospital in China recently signed, and we are in final negotiations with a second system in Utrecht and with the GOP in Turkey where the negotiations are now in the final, final stage.We are on track for starting installation of one system per month this fiscal year, including the 5 systems we are installing in China this year for the clinical trial. The FDA application is on track. We have answered explanatory questions and expect the FDA clearance towards the end of the calendar year. With that, I hand over to Gustaf.
Thank you, Richard. This is Gustaf Salford, and I'll take you through the financials of the quarter. As Richard said, our net sales grew 6% in the quarter and 7% year-to-date in constant currencies. All our regions contributed positively, and Unity installations are now starting to drive net sales.The gross margin increased from the low level in Q1 to 41.4% in Q2 in isolation. The key drivers were increased share of projects in mature markets as well as better product mix with Leksell Gamma Knife and Brachy installations with higher margins. This led to an EBITA margin of 18% in the quarter. We see further significant improvement potential in both gross and EBITA margin in the second half. I'll come back to this topic later in the presentation. We continue to focus on keeping our operating costs under control, and we saw a 3% decline in constant currency compared to the last quarter. If you compare it to last year, our expenses were significantly up 11%. The increase is related to higher R&D amortization and lower R&D capitalization following the CE Mark of Elekta Unity in the first quarter. If you adjust for this effect, you'll see that our gross R&D spend was downward 8% versus last year. We usually measure our gross R&D spend in relation to net sales, and we came in at 11% on a rolling 12-month basis. Going forward, we expect R&D amortizations for remainder of the year to be at Q2 levels of around SEK 180 million, and capitalization rates will increase when more R&D projects reach the development phase. In summary, we had a strong focus on cost control during the first quarters of the year, and this will continue in the coming quarters.So turning to the EBITA development in the first half compared to last year's first half, you'll see 3 main drivers. Firstly, the positive volume effect from increased installations and service growth amounted to some SEK 332 million. Secondly, price and product mix, together with cost development, had a negative effect of SEK 272 million. Thirdly, investments in the commercialization phase of Elekta Unity and less R&D capitalization add up to SEK 217 million. During the first half, we also got a positive impact from currency on EBITA level of some SEK 69 million. All in all, EBITA came in at the same level as last year, and the EBITA percent was 16% year-to-date.EBITA is expected to improve in the second half of the year. The largest driver is volume. And we continue to see good growth for the year, both in solutions and service. With higher volume, we get better leverage on our operating expenses. We expect the continued increased share of mature market installations with higher margins. Also, we start to capitalize on some ongoing research projects during Q3 and Q4. At the same time, we will invest in innovation and geographic expansion to drive further growth. With current exchange rates, we foresee a positive impact from currencies of around SEK 175 million on EBITA level for the full year. All in all, we're executing on the plan to reach our EBITA margin target of around 20% this year.Our cash flow improved significantly in Q2, primarily from the growth in EBITA. Net working capital levels were maintained at minus 13% to net sales. The main movement in the quarter was an increase in accrued income, which mainly related to ongoing Unity installations but was offset by higher accounts payable. DSO was at a negative 64 days, slightly up from negative 75 days last quarter. We continue to focus on achieving a stable and strong cash flow going forward, and our business plan supports negative net working capital levels.Finally, turning to our cash conversion and financial position. Cash conversion during the rolling 12-month period was 81%. Net debt amounted to SEK 1.3 billion at the end of the period, representing 0.5x EBITDA and 0.2x equity. During the coming quarters, we expect our net debt-to-EBITDA ratio to continue to decrease.So with that, I'll hand it back over to Richard.
Thank you, Gustaf.So some key takeaways for the first half year. There is a strong market out there, and we continue to see good order revenue growth in major markets. Interest in Unity is stronger than ever, and the sales funnel continues to grow, and we expect the strong order intake in Q3. Finally, I see many exciting opportunities out there, and Elekta is well-placed to capitalize on these. In essence, we are continuing to do what we say also in our process improvement activities.We aim to be thought leader in precision radiation medicine also in the future. With our focus on thought leadership in precision radiation medicine, we are increasing the addressable market by expanding the role of RT for indications, which are covering liver, stomach, pancreas, lung cancer, et cetera. We are focusing on radiation as the tool to treat cancer. We focus on precision, both on geometric precision as well as the necessary personalized data at a fingertip with our software solution. And we focus on the medicine aspect of it because we integrate with our software workflow solutions the different aspects of treatment of cancer, like surgery or medical oncology together with radiation therapy. I received very positive feedback on this when I talked to our customers about this topic of our strategy. It resonates well with them and with our robust product portfolio.Finally, we reiterate our guidance for the full year with around 7% top line growth, and we expect to reach an EBITA margin of around 20% for the year, as Gustaf has explained. With that, I hand back to Gunilla to start the Q&A session.
So thank you, Richard and Gustaf. And we are now happy to try to answer your questions. So please.
[Operator Instructions] Our first question comes from the line of Annette Lykke from Handelsbanken.
First of all, some questions on the various approval processes for Unity. Have you at this stage received any, I would say, unexpected questions from FDA in respect to your tissue heating, et cetera? And also, in respect to Unity approval but in China, the time line, is it still expected to be second half of 2019 or towards maybe year-end 2019? And then in respect to regulatory stuff, you have previously discussed a low-spec linac that would, for example, be interesting for the Chinese markets and all the new systems coming soon. When do you expect that product to potentially be available in China? And then I have a follow-up question.
Okay. Okay, thanks for that question. And first, with the -- for the FDA, the lengthy question towards Unity, no, there were no unexpected questions coming from FDA. We got a series of question which were more explanatory and to get more -- to explain our structure of the system, et cetera, like what is combined with what and all the workflow but not so -- not related to really underlying basic questions, which sometimes I know have been pushed out from the -- from our competitor to disturb the market. No, that was not the case. And we answered all of them diligently, and that's why I said that we are pretty confident that it will happen until the end of this calendar year. Related to China, we have -- we are right now underway to install these 5 clinical sites in China. They will probably be up and running in the first quarter of next calendar year, and they will start. So we expect actually to have a clearance more towards beginning 2020, first half of 2020. Typically, the studies still need a certain time in the relation of it, so that's the time frame for that. In between, I mean, there are a few more countries out in the world, for example, Canada, Japan, Korea, that will all happen, we expect to happen in 2019 in the kind of series of events, first starting with Canada and then Japan and Korea, and that would cover the majority of the main markets. Now related to what I would call the value linac, I would not call it low-spec linac because our ambition is to create -- to provide precision radiation therapy also to the developing countries and to emerging countries. That is a time frame where we expect to see that get into the market, that's the end of next calendar year, so towards the second half of next calendar year. And it is based on an existing system architecture of our product line. So we don't see a major issue with regulatory topics.
Okay. Then just a short follow-up on Unity orders, Richard. Now that you have finalized the 2 orders in November, soon to sign another 2, should we expect the Unity orders sort of to be accumulated higher, like maybe 6 or 8 or it's -- for the Q3? Or is it just that the Q2 was low?
No, I would go with your -- the numbers you mentioned, yes, for Q3.
Our next question comes from the line of Sebastian Walker from UBS.
It's Seb Walker. So 3 if I could, one on the Americas order growth. So what exactly is driving the weakness that you're seeing in service orders? The second question is on Unity. So 0 orders in the quarter, and the orders that you booked this month are in Australia and China. So maybe why aren't we seeing more U orders coming through given you had the CE approval in June? And then finally, on China, so what's your take here on the Ministry of Health's message on the quotas? I mean, my understanding is the quotas have been sealed in the past. So are you more positive this time around? And if so, why?
Okay. So the weakness of the orders -- service orders in United States is simply a miss on renewing service orders, yes. So our installed base is actually effectively growing in United States, so we are not worried about that situation. Service contract coverage is high in the United States, but we just missed in a way. And we are analyzing what really was the reason, probably manpower or something or change of management on the service side, which has missed in this quarter to go after a few renewals in time, which should have been happening, yes. So that's the major part of it. There were also some -- a few slippages of linac orders, I want to be open on that, into this quarter, but those are already booked now. So it was like a timing aspect. So that overall, I think was -- the result was a weak order income in the United States, yes. That's one thing. Now on the Unity side, you are right. I mean -- and we are happy actually also that we get orders for Unity also outside Europe. That's number one. The -- and we see this happening more and more so. I think the other -- undersigning is now in Istanbul and in Turkey. And of course, the fourth one is Utrecht, which is showing that second system, clinical system in Utrecht, which shows that they are really excited. And as a pioneer of this thing, we're really kind of believer in that, I think. The slowness in Europe relates a lot through the complexity, in particular in the -- I'd say, from the leads towards the closing of a deal in the public health segment in Europe. Take Germany or other university hospitals which are mostly financed through the government, yes. It just takes in the bureaucracy sometimes longer than we expected or be comparably longer than in a normal linac case, yes. So -- but that's understandable sometimes. We are trying to set up processes which help them to -- with arguments to make that faster. But it just takes a little bit of time to do it. We have a lot of those projects running. There's not -- they are not existing or that we have lost them. It's more a timing issue. And the last question is about China. Well, usually, I have to say one can believe public announcements in China more than in many other countries. And it's -- my experience for living 6 years there was quite positive on that one. If you just look at high-speed train development or anything else, they are quite amazing what they implement if they want to do something. We quite -- we are quite confident on that plan, and we also have seen with our network in China that they are not only doing it centrally, but also, they are already discussing with the provinces and with the individual hospitals even. And we feel strongly that with our connection in the country and now present there, that we can open and facilitate that even a bit, and we will do so. It's not only that the linacs are important there. It's also the education program, the training and this kind of topics, which are -- which we are really differentiating ourselves in this country. And so from that point of view, yes, we believe in it, and yes, we are preparing ourselves to execute on this.
Perfect. And just to follow up, so on the service orders, when -- so when you say missed, I just take from it those are contracts that have now gone to competitors? Or...
No, no, no, I mean, we're -- no, no, we do our service ourselves, of course. It's the renewal of it, it's not a -- it's just the miss of the timing to renew them, some of them, yes. We renew typically a little bit in advance, and for whatever reason, we're analyzing it still, there was not enough emphasis on it in this quarter. There -- and there was also a change in service management in the United States. Maybe that was something related to that. But we are working it up right now, and we see that happening, coming back also from a volume point of view.
Our next question comes from Michael Jungling from Morgan Stanley.
I have 3 questions, please. Firstly, when it comes to Unity in the United States, once you receive approval, do you expect the orders to come in quicker than what we've seen in Europe to date? Secondly, a question on Unity Europe. I think from memory, in the past, you sort of suggested that the reason you haven't received any Unity approvals before the CE Marking, which I think was legal in Europe, was that boards also at hospitals were just waiting for the CE Mark approval for the formal stamp. Why is it that since then, we hardly received any orders, whereas we've had U.K., we've had Switzerland but not in Germany, not in France, none in Italy, et cetera? Why has the narrative changed a little bit? And then thirdly, on the China large medical equipment purchase plans, can I just please understand whether the development will result in acceleration in Asia Pac order growth over the next 12 months? Should we expect a material improvement in order growth within Asia Pac?
Okay. The U.S. orders, we expect to come in rather quick after the FDA clearance because there is quite an interest in many sites, and there are discussions as far as they are possible on this technology. You know that we are installing already a few systems. For example, Memorial Sloan Kettering is our main installation right now. So there is quite some interest. So yes, I see that happening in this, what I would call less public sector market U.S., so more private initiative and big, big fundings happening faster, yes. So that's number one. So Europe, yes, I mean, there are a few aspects to it. One is this rather long, I would say, phase between lead and really close -- through to closing. There were aspects of -- and I mentioned them also earlier, that we need to show a real clinical system, which then happened with the final CE installations that you remember in June, July, August on the systems. Now we have 5 Unitys now running on clinical -- complete clinical patients and growing that installed base now. So to see -- the reference that there was another aspect, just takes time to then scale listings, et cetera, et cetera. But the major aspect is certainly that there are simply complexities in these projects but mostly from building sites, not particular related to our solution but related to the fact that this is a larger equipment, this is a big equipment with a big budget. It has to go through different levels of approvals because it's larger than a normal one. And that leads typically then to -- even with a CE label, to some -- still some delays in the process. That's it. We see a good dynamic actually in Europe, for example, on more private projects being [ indiscernible ] Italy or others. And also, for example, Proton Partners, yes, that is faster. And we will definitely also focus a bit more on this one also because we see quite a significant level of patients being done on the private side. And then the China thing, sorry, I forgot now that question.
Yes. I'm just trying -- the question, when will the impact on our order intake come?
Oh, yes.
And I think reviewing it with the China sales organization, we don't expect a major impact this fiscal year. It will primarily come into next years, but there could be also some impact in Q4. That's the visibility we have at this moment.
Great. And maybe a brief follow-up on U.S. approval for Unity. You mentioned just I think that the order intake should be faster. Can I just ask why -- for instance, the level of complexity headwinds that you have in Europe, getting things signed off, why would the U.S. market treat those complexity, et cetera, in a faster way than in Europe? I'm trying to understand the difference in perhaps customer behavior, why the U.S. would be faster than Europe in terms of the order intake.
I think there are, I would say, 2 aspects to it. One is, we've asked ourselves -- I mean, we are learning also. We are learning how to do the things quicker, evaluating the MAGNET and positioning on the main, those kind of stuff. So -- and all the preparing side, et cetera, I think we are learning also with the installations. So that is one thing. And then if it's in January, February or so, coming then, we have quite learned quite a bit already. Secondly, I have seen various sites where they -- independent of FDA clearance or not, but they were already preparing in U.K. center bunkers, which basically were prepared for Unitys. So from that point of view, I think it is a little bit more advanced than in other situations in Europe.
Our next question comes from Romain Zana from Exane.
I have 3. The first one will be on the order growth regarding this 2 percentage points in constant currency. Could you give us the breakdown of the contribution from Unity versus the rest of the business? Second question -- yes?
Should we start with the first one?
Yes.
Yes.
Yes. So it's quite easy in the quarter, it's nothing really. So -- but year-to-date, it was the 4 orders we booked in the first quarter. But was that really your question, Romain?
Yes, but...
I understood it more like what should we have expected normally, right, from the Unity in the quarter. Is that what your question was?
No, I was actually referring to the -- if you look at the incremental sales on the orders and you assume an average price for Unity, you would end up to a contribution of growth, which, according to my estimates, would be like 5 percentage points, and you would have the legacy business declining. And these would come up to at least 2 percentage point of growth on the order side in constant currency.
So yes, I understand. I mean, in the quarter, we didn't have any Unity orders. We will then have more Unity orders in Q3, absolutely, I agree with that. But the 2% order growth is in the isolated Q2. Year-to-date, it's around 6%, and there, we see some contribution from the Unity orders we booked in the first quarter. Going forward in the year, it is what Richard's talked about. We see a good start of Q3. We see more opportunities in Q3 on top of that. And then Q4 is strong -- should be a strong Unity order because we should have the FDA clearance, and we have then gone through even more European tender processes and focusing also on private customers around the globe.
Okay. Second question is on China. Can you remind us what has been the growth run rate over the past 12 months for Elekta and what kind of acceleration you would expect related to the new Ministry of Health investment plan?
Yes. I mean, we have seen double-digit growth rates in China for a long time. This impact of the program is significant. So even if you have conservative views on how many of the 1,400 systems that were actually booked, it will be a significant order growth impact on our APAC numbers, starting then primarily in the next year.
And would you expect a tougher pricing pressure on such bigger tenders or it should be -- I mean, the existing pricing should be sustainable?
We don't foresee -- expect such a pressure. What we would expect a bit is, of course, that maybe local manufacturers are being a bit -- not preferred but at least brought into the game now more than in the past. But with our strength in China and our network and presence there, I think we have a good opportunity to cater to this program. But we also have to prepare ourselves because that means really that we need to add people also to cater to this in order fulfillment, in service and training. And we are preparing right now a program for that.
Okay, got you. And last question if I may. Because I think you alluded to the skew and the significant profitability catch-up you need to deliver to match your guidance. Can you detail what proportion should come from the gross margin versus the order expenses optimization?
It's primarily leveraged on gross margin, I would say, from volume, better product mix. And that's the key drivers. And then leverage on expenses we have in gross margin, such as service, manufacturing, order fulfillment, that's the key driver. We will get this R&D capitalization effect that I mentioned, but that's smaller. And then it's these investments we are talking about in key markets. And Richard mentioned one example in China, for example. And then we have this positive currency effect that primarily hits the top line of around SEK 100 million in the second half.
Our next question comes from the line of Kristofer Liljeberg from Carnegie.
I have 3 questions. The first one is, would it be possible to give the size of those missed renewed orders in the U.S.? Second question, coming back to Unity in the U.S., so would you expect some orders already in January, i.e., to be included in the third quarter this fiscal? And finally, on China, it seems visibility here for this new massive program might be better than I thought. So do you expect the 1,400 machines to be evenly split between the deals up until 2020? Do you think it will maybe take a little bit longer? And also, what's your view here on the bottlenecks when it comes to skilled employees to handle these products? Because it is a pretty rapid increase of the installed base while the number of skilled employees, I think, is growing more like 10% per year.
Yes. So on the missed service in U.S., it was the miss of renewals. We also have the capital amount, the service orders in the previous quarter last year that impacted as well. So that's the 2 key factors. We had quite a difficult comparison as well in the U.S., as Richard said, on the solution side. So we would have shown a significantly better number, of course, if we wouldn't have had flat service orders. But it wouldn't have been a great quarter even if we exclude that effect in the U.S. So we will continue to drive top line orders in U.S. in the second half.
Not on the U. S. orders, but would U.S. orders have been flat if you had done what you should have done when it comes to the service orders in the quarter?
No, we would have -- we had -- we saw these orders there as well. So it's not only relating to service orders. But we see an uptick here in Q3, and then we see improvement there in the second half as well.
And then the second question, Kristofer, from -- for the Unity in January, we have -- that probably is a little bit too tight. We don't have, as far as I see now, list. We have not planned right now from the United States in January already, okay? But if -- well, I never say no. We -- maybe we can accelerate one or so, but at the moment, it's not planned. And then the split, we're...
Yes. So without any U.S. orders in January, you still expect, or at least you said, 6 to 8 unit orders in total third quarter is not unrealistic?
Yes.
Okay.
And then the 1,400 linacs in China, I think it will not be evenly split because as you correctly mentioned, they need to prepare themselves in terms of -- well, not even the training and education but even designing the tenders, et cetera, because everything has to still go through tenders locally then. It's just a burden where we try to help as much as we can in the phase of -- or in the early phase. But I would say it's more towards year 2020 then that this happens. As Gustaf also said, I mean, we don't see a big effect in this fiscal year yet. We don't expect that, but maybe a little bit. And then '19 and '20 especially will be big. And yes, we will -- the training aspect and the education of the people are very important one. That is also why I think our launch of this value linac will be very, very positive. We've seen the simplicity, and ease of use, ease of installation will be a major -- is a major part of that. So from that point of view, I think we are prepared for that.
But if you don't expect much for this fiscal, is it really realistic to assume that they will be able to do this until 2020?
Well, delivery is a different question, but I would say orders, yes. And -- yes.
There's one big other factor, and it's the breakdown by region and province. And historically, we haven't seen so deep the breakdowns and also a clear transparency on what the actual installed base -- or by all city and all region. So that's an indication to us that it is -- a lot of work has been going into this plan to look at the underlying need. And that's the indication that it's -- we will execute on it as well.
Our next question comes from the line of Kit Lee from Jefferies.
I have 2 questions, please. Just firstly, just to come back to your Unity order pipeline, I think you mentioned that you have 2 concepts now that you are in the final stages. But can you also talk about customers who are in an advanced stage of negotiation for Unity orders? And how should we think about that in terms of that funnel coming through to closing for the next few quarters? And I'll come back to the next -- second question.
Yes. As I said, these 2 orders which are basically closing any day, is Utrecht, the second system; and GOP. We have, as I pointed out before, but I don't -- I cannot disclose the names now. There are more projects which are very, very close to closure and will contribute to this quarter. The funnel overall is increasing. In particular also, after the ASTRO, lots of interest. Clear -- I mean, you probably saw also the changes in the -- or the feedback from customers, which was published yesterday in one of the reports. That's also what we hear, what I hear when I go around, that it is more and more seen as being at some point in the future standard of care for cancer treatment in the -- when it comes to precision -- to higher precision, to also hypofractionation enablement, et cetera. So the results of the first installation shows -- these patients show definitely that it does what it's supposed to do. And I would say that we're not even talking about MR linac, but I'm talking about the -- I'm not talking about Unity linac, I'm talking about MR linac. It's a technology is definitely something which is perfecting itself, yes.
Okay. And I guess, I know on the increased quota in China, I guess that's a positive news. But have you had any specific discussions with your customers in China, which point to the ramp-up of order from next year? I'm just wondering whether they have already secured funding or they have already come out with a detailed plan to soak up the increased quota because as far as I understand, the last round of quota wasn't completely filled. I mean, just wondering what are you seeing on the ground now that points to the order ramp-up next year.
Well, let's say, I mean, yes, we have strong contacts -- I personally have also strong contacts from my own history in China with the people. And we have -- we hear that from all sources, I mean, that the serial phase, there is a clear commitment of China towards increasing health care -- quality of health care in the totality of the country. That's what Gustaf said before. There is a detailed plan of rolling out those number of Unity -- of units -- not Unitys, but units, linacs to the different regions, also remote regions of the country. And I think that shows a bit more the commitment of the country. We had recently a board meeting in China. I had the pleasure to meet one of my former friends from -- minister of science and technology of China until earlier this year. And he also made it very clear that there is a momentum going forward to improve health care, in particular cancer care, in the country. So from that point of view, we're very convinced about this program being a major, major impact.
Our next question comes from Hans from Nordea Markets.
It's Hans Mähler here. First, the question on the gross margin. Would you say that the geographical mix has normalized now? Or should we expect any change to that impact in the gross margin for the second half? And also, maybe you can discuss the letters of intent you signed in China. Are they a result of the new licenses? Or how should we see it? And then what kind of products do they include?
Thank you, Hans. If I start with the gross margin question, yes is the answer. So in Q1, we had 2 negative effects, in a way gross margin-wise, and it was a lot of emerging market installations with a little bit lower margins. And we had lower strategic margin deals in U.S. and Western Europe impacting the gross margin. If you look in Q2, I think that's the first indication on how it will look in the remainder of the year, and we saw a better ratio of mature market projects. We also saw a better product mix with more Gamma Knife and Brachy. And we also see an opportunity to -- on the software side based on new launches, et cetera, to drive margin in the second half of the year. I see it as a trend that will continue.
And I take the second question on the NOIs in China because I was firstly there and witnessing a few of the signing ceremonies myself. This -- it's interesting -- it was interesting for us to see it was actually covering quite a lot of different provinces. In that sense, it was already a bit related to this program probably. But we have to see now because these are intense and similar things and moving forward because -- almost all products actually, Brachy and everything and -- signed in this memorandum of understanding. And I should also not underestimate, the Icon is now released in China as well with a big -- quite a good momentum there. I personally gave a presentation of -- it was more a TV kind of thing, which combined Icon and Unity as a proposal for precision radiation medicine, which is very well received. And actually, there were already some Icon deals in these LOIs also included. So it was a very broad approach, very broad in regions, very broad in products.
Our next question comes from Johan Unnerus from Pareto Securities.
Johan Unnerus from Pareto Securities. Yes, a few questions. First one will be looking at the 12-month order growth organic, constant currency and back out the Unity order support even if it wasn't anything. This particular quarter, you seem to be -- the order growth is distinctly below the market growth. You pointed -- alluded to that you expect Brachy, Gamma Knife and software to improve, but maybe you can expand on that. Will we see a change when you come up with new versions for planning and workflow for a start?
Okay. So the order growth, I clearly want to state it again that it was a disappointing 2% in the quarter. But if you look at our rolling 12-month leverage, we are at 8% already. So that's already then kind of bigger than the market growth and what we see right now or a little bit bigger than the market growth. So from that point of view, yes, it was not a great quarter. But we know the reasons behind that, and that's not lost deals or something. So it's basically coming back. And with the 8% in the last 12 months, it's a good starting point, yes, and a good basis. And there is also quite a pipeline of Gamma Knife -- Leksell Gamma Knife, which we expect also in the second half of the year. And then Brachy is doing actually quite well. So we actually saw a growth also on Brachy, again, which was a little bit low. And then last but not least, really a very strong momentum we feel and see right now on our software products, both on the TPS side with our Monaco HD, which we introduced at the ASTRO, but in particular with our MOSAIQ Plaza. Some of you know -- you might recall that we always were blamed for, "Oh, you did Unity, but it didn't do anything in software in the last 5 years or something like that." And people realized that we have really good offers now with this MOSAIQ Plaza, real offers, existing offers, which we now train and sell already. And I think that makes quite a difference also in particular with our larger installed base of MOSAIQ because they can be added and upgraded there as well.
Yes. But also, to be clear, if we look at the 12 month and then look at the 12-month support from Unity even if you didn't have any in this particular quarter, and if we reduce the 12-month order growth from Unity and looking at the traditional business, then you're pretty way below the 7% market growth. So that's something that clearly needs to improve.
Well, also note that, that includes also Monaco deals. I mean, so then you have to first discount the 7%, too, right?
Yes, okay. And...
You have to then make -- and then you have to make -- because that was actually a little bit the argument in earlier quarters, I recall, that if you do that, then we actually were even better in the -- what we call base business in comparison with Varian. So in that point of view, we have -- let us analyze it a bit more, but it's not such an easy calculation that you pointed out.
The key message, now we are launching Unity, and that is clearly part of our order growth in order intake. And that's how we see it the last year and also the coming years going forward.
Yes. But you also have to see you don't miss out too much on the base business, which in the prior periods did not include Unity. Yes. And anyway, the U.S. -- American part and the software services upgrade, it seems, well, nothing short of extraordinary that -- because it's a mature market in terms of linac penetration. And to not to be focused on potential upgrades seems strange. But yes, there's clearly something that we need to keep track on going forward.
It was not upgrades, it was service, just service deals.
Yes, but that's clearly very important in a mature market.
Actually, of course, of course. And that's why -- and we know that our installed base is growing in the United States, and we know that we have a high coverage of software -- of service. It really was an operational miss, in my opinion, which we're analyzing right now and fixing. And I think...
Okay. And finally -- yes, on the public market in Europe, it's been slow obviously. Would we -- should we expect support for Unity on that side, say, towards the end of this year? Or is that something that we will see more of the next year?
Just -- I mean, if you mean the public market for Unity in Europe became slower, yes. But the market in Europe, which is mostly also public, is actually good, yes, so -- for linacs, et cetera, so from that point of view. But yes, we are expecting an improvement on that one as well for Unity, yes.
Our next question comes from Veronika Dubajova from Goldman Sachs.
I also have 3, please. First, starting off on the U.S., there is a proposal moving forward towards introducing a bundled reimbursement for radiation. I'm curious what your thoughts are and what that might mean for the demand in the U.S. So from an absolute number of systems and the types of systems that radiologists are interested in acquiring, and if you're hearing anything at all in terms of the slowdown in demand as we await more details about the bundled proposal. My second question is a question on your gross margin guidance for the full year. I think, Gustaf, that Q1, you say that you expect gross margins to still be lumpy 2% -- 42% to 43% for the year. And I just wonder if you can confirm that since you are tracking meaningfully below that in the first half of the year. And my last question, and sorry to belabor the point about China. But I want to understand what confidence you get about this quota action being realized. As far as I'm aware, there is no additional funding that has been provisioned for the theoretical 1,400 linacs that they're seeing today. The procurement is still being funded by the Five-Year Plan, which was announced last year, which did not call for such a significant work in radiation oncology. And if I look at the market today, my -- our estimates suggest this is a 200-unit market max per annum. So what you're talking about here is effectively doubling of market growth, which seems pretty hard to imagine given the lack of skilled personnel. So I want to understand kind of, is your perception that there is more funding being dedicated to this? And if so, where is that funding coming from? And is it additional to the Five-Year Plan? And if not, why do you think these units will actually come through if there is no funding commitment for them?
Okay. So if we got the questions right here, Veronika, it was first on the payment, the second question was -- can you just repeat that one?
Oh, the second question was gross margin for the year.
Yes.
Yes, how it should improve in the second half. Yes, okay. But if we start with your question on bundled payment, we saw the news from CMS and a new report. And I think our read is that we see positively on the Gamma Knife side, it's a bit better reimbursement, and that's, of course, a positive signal. We are conservatively positive on -- more on the linac side. We're following the bundled payment discussions and announcements there. But our understanding is that it's still quite a lot of details that need to be clarified before we get the true impact on the purchase decisions of hospitals out there. So we are tracking it. We are conservatively positive. I think that's our stance right now.
And I might add -- actually, Veronika, I might add that if you look forward in the reimbursement for Unity, we see a bundling aspect as a positive one because I mean, the idea of Unity is that you promote hypofractionation by precision. And in essence, I think that the bundling idea, sort of the time or the effort per patient, yes, which is, in essence, lower on Unity than on a normal system is -- because of hypofractionation promotion is, of course -- and particularly moving to parts is, of course, an interesting one. So we are semi positive on this one, yes.
Okay. But I mean, actually, if we move to more hypofractionation, would we see a smaller installed base in the U.S. altogether?
But as -- we discussed it already even before many times, and I think my colleagues from our main competitors said the same thing: there is an overarching need for -- increased need for cancer care through the growth of cancer and secondary cancer and more possibilities to be treated with radiotherapy, which overcompensates the effect of this hypofractionation as well, yes.
And then I think on the gross margin side and our confidence in it, it is -- we have a new model now in Elekta on our revenue side. And this is, to a large extent, driven also by revenue and leverage from revenue. And since we are doing it at start of installation, we have a much better visibility of our top line going forward as well. And then on the product mix and so on, that is what we have in our forecast, and that will then contribute to our gross margin as well. If you go further down in the P&L on the gross expenses down to EBITA level, that's more in our own control. And it is to have the right balance between these new investments in innovation and growth but, at the same time, hitting the guidance we have of around 20% at the end of the year.
Gustaf, I think you said at Q1, you were expecting gross margins to already improve to that 42% to 43% range in Q2, and you come in below. So I'm curious how much visibility do you really have.
Yes. I think what we communicated in Q1 was that we were looking at margin improvement in Q1-- oh, sorry, Q2. If you look at the full year number, we need to be at the number you mentioned in order to come down to EBITA level of the around 20%. So that was more the full year logic.
Okay. And on China?
China, I think there are -- we are confident that there is a significant part of this program being realized. And I think China has typically not -- typically doesn't do it like that, that they kind of bring out huge things and have no basis behind it. I would, however, also say that it's not all public, I think. There is a promotion of private sector in China as well, as you have heard. And maybe -- and what we see actually -- what we feel is that this private sector might also be used by -- to basically support this program. But that's speculation a bit, but I think this is a very high likelihood that this will happen. Interesting private sector models now in China as well.
Okay. But you have not seen any additional funding going to radiation as a result of the slowdown? There has not been an announcement suggesting more funding going to radiation?
We are not involved in the budgeting process of the Chinese government. Okay.
So thank you. We're a bit over time. So thank you very much, and welcome to our next quarterly report, which is due the 22nd of February 2019.
Okay. Thank you very much altogether. Talk to you soon.
Thank you. This now concludes our conference call. Thank you all for attending. You may now disconnect your lines.